Business Finance

Is the Employee Retention Credit Real?

Jun 06, 2023 • 7 min read
Table of Contents

      The Employee Retention Credit (ERC) gets a lot of press, due to the significant tax savings it offers small business owners. Unfortunately, how it’s advertised can make it seem like a scam, especially since some dishonest parties try to take advantage of people who seek it.

      However, the Employee Retention Credit is definitely real. Let’s go into more detail to help you feel more confident in its authenticity.

      Is the Employee Retention Credit Real?

      The Employee Retention Credit is a legitimate tax credit that rewards businesses for keeping their employees on the payroll during the COVID-19 pandemic. It was a part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act passed in 2020.

      The substantial amount of inaccurate information about the ERC online can make it appear too good to be true. But in reality, applying for the ERC is a rigorous process, and there are extensive regulations that determine who qualifies and the size of the credit they receive.

      It’s best to consult a tax professional, such as a Certified Public Accountant (CPA), for assistance. They can help you get the maximum credit amount you’re eligible for and complete the necessary forms on your behalf.

      If your claim is ever subject to an audit, their support becomes even more valuable. They’ll be able to organize your documentation, represent you in communications with your auditor, and answer any questions you have during the process.

      Before you hire someone claiming to be a professional, do your due diligence. Look up the status of your prospective CPA’s license to make sure they’re in good standing, read through their customer reviews, and take advantage of free consultations.

      Who is Eligible For the ERC?

      If you started your business before the pandemic, you could potentially qualify for the ERC in 2020 and the first three quarters of 2021. To be eligible, you must satisfy the following three requirements:

      • Your private sector or tax-exempt organization operated in 2020 and/or 2021.
      • Your organization paid qualified wages to employees in 2020 and/or 2021.
      • Your organization experienced a sufficient decline in gross receipts during the pandemic or suspended operations to comply with a related government order.

      The first hurdle is pretty straightforward. It primarily prevents governmental agencies from claiming the credit, but for-profit and nonprofit organizations are both eligible.

      The second requirement is a bit more complicated, with the critical issue being the definition of qualified wages. In simple terms, if the average number of employees on your payroll in 2019 was below a certain threshold, all the wages you paid are qualified. If you surpass that number, only the wages paid to workers not providing services qualify.

      Of course, the last requirement is the most challenging to understand and satisfy. To show a sufficient decline in gross receipts, you’ll need to prove that your 2020 and 2021 amounts fell below a certain percentage of your receipts in the same quarters of 2019.

      Alternatively, you can clear the suspension of operations test instead. To do so, you must demonstrate that you shut down a “more than nominal portion” of your operation to comply with an official mandate from a federal, state, or local government agency.

      Recovery Startup Business

      If you started your business during the pandemic, you probably won’t qualify for the ERC under the regular employer rules. However, you may still be eligible for the credit in the third and fourth quarters of 2021 as a recovery startup business.

      To claim the ERC that way, your business must have started after February 15, 2020, average less than $1 million in annual gross receipts, and fail the “decline in gross receipts” and “suspension of operations” tests.

      How Much Can You Claim Through the ERC?

      The ERC is a fully refundable payroll tax credit. That means you can subtract it directly from your business’ payroll tax liability, making it even more profitable than a tax deduction. If your ERC exceeds the amount you owe, you could even get a tax refund!

      When you qualify for the ERC as a regular employer, you can claim 50% of every employee’s first $10,000 in qualified wages during 2020 and 70% of their first $10,000 in each of the first three quarters of 2021. That’s where the frequently mentioned “$26,000 per employee” number comes from.

      If you qualify for the ERC as a recovery startup business, the same 2021 limits apply. You can claim 70% of the first $10,000 in qualified wages for each employee quarterly, but only in the third and fourth quarters of the year. In addition, the total can’t exceed $50,000 in either one, capping you at $100,000 for the year.

      How to Avoid ERC Scams

      When large amounts of money change hands, there are often people trying to take a piece of it for themselves. The ERC is subject to this issue, with some scam artists looking to make money off people who want to claim the credit.

      Because there’s no end to the different tactics they can use, you won’t be able to learn every last variation. However, you can learn to spot the red flags that should tell you when to watch your step. Here are some of the most significant ones:

      • Exaggerated promises When something sounds too good to be true, it often is. Avoid anyone who makes extravagant claims about the ERC, such as guaranteed approval or suspiciously high credit amounts.
      • No government order research – ERC providers need to research state government orders to ensure qualification and proper documentation due to varying orders during the pandemic.
      • Focusing on supply chain disruption – To qualify for the ERC, any supply chain disruptions must be tied to a government order limiting commerce, travel, or meetings due to the pandemic.

      Ultimately, the best defense against ERC scams is to educate yourself on the tax credit and how it works. Not only will that give you a clear path toward filing successfully, but it will also help you identify the falsehoods that potential scam artists often tell when attempting to defraud you.

      Apply For the Employee Retention Credit

      While you can no longer earn the Employee Retention Credit by paying wages to your employees, there’s still time for you to claim it retroactively by filing Form 941-X with the Internal Revenue Service. For quarters in 2020, the deadline is April 15, 2024. For quarters in 2021, you have until April 15, 2025.

      If you’re unsure whether you qualify for ERC, our easy-to-use application can walk you through confirming your eligibility. You can also use it to help complete your tax forms and file them appropriately.

      Since we’re on the subject of scams, don’t worry—it’s both free and completely safe. We’ve even partnered with CPAs who specialize in the ERC to ensure you have access to all the expert assistance you need. Give it a try today.

      Learn More: If you’d prefer to read more about the ERC before you proceed, check out some of our other resources:

      About the author
      Nick Gallo, CPA

      Nick Gallo is a Certified Public Accountant and content marketer for the financial industry. He has been an auditor of international companies and a tax strategist for real estate investors. He now writes articles on personal and corporate finance, accounting and tax matters, and entrepreneurship.

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